Top Trading Strategies Using Candlestick Chart Patterns

Candlestick chart patterns are a useful tool in analyzing data to come up with your own trading strategies. Understanding the most popular stock chart patterns can be helpful when forecasting the future price of a stock.

With all the charts we share in this article, it’s important to know them and be aware of them, however keep in mind it can be difficult to seek them out and find these patterns in every day data analysis.

One of the things you will want to really be careful of is what we call the “Oasis Factor” that can occur when analyzing stock prices and trends. You may start to see chart patterns that are not really there. It’s easy to start imagining patterns that don’t actually exist. The way to avoid this “oasis factor” is to be patient and to let the opportunity present itself to you rather than seeking out an immediate buy.

Here are the Top Candlestick Chart Patterns for Trading:

{Note – to keep things simple and to make them easier to understand for beginners, we did not draw in the candlesticks…simply the pattern}

Head and Shoulders Chart Pattern

The head and shoulders stock chart pattern is one of the most widely used patterns when analyzing trends. It is also regarded by many as one of the more reliable patterns. In this pattern, there are several points which create a “head and shoulders” formation that indicate a reversal in the stock price, which means the prices will change direction.

The pattern shown above is a bullish head and shoulders pattern which shows the stock price is turning upwards.

In a bearish head and shoulders pattern, you’ll notice it is the opposite, with prices at the reversal point going down.

The Cup and Handle Stock Pattern

This is a stock pattern that is relatively difficult to find in short range stock chart evaluations {such as a time span of just one day, week, or month for example}. However, it is a bit easier to spot when you look at a time frame of stock price data that spans 1 year or longer.

In this example of the pattern, you’ll see the stock price rise, then fall down and rise again in a curving pattern forming the “cup”. The “handle” is created when the stock price drops and then rebounds to rise again. When you’re looking at the price action of the stock, the first thing you’ll notice is the curved bowl that forms the cup. Once you notice the “cup” you can then start looking for the handle. Do not be discouraged if you don’t find this pattern very often, but it is definitely one to know about it because if you spot it you will be able to capitalize on the opportunity and it may be an indication of future price movement.

Rounding Bottom Chart Pattern

The Rounding Bottom, also known as the rounded bottom, is much like the cup and handle chart pattern we showed above. Again, this is one you are going to see amongst months/years – not a matter of days. The key difference in this pattern from the cup and handle chart pattern is simply that there is no “handle”.

Double Top, Triple Top, and Bottoms

Here we will go over two separate patterns that are very similar in nature. First and foremost, if you are going to take any pattern seriously, this is the one that can cause you to lose money fast if caution is not exercised. These patterns more often that not can serve as a serious warning, especially if you are day trading.

In our example below we have the double top pattern. You will notice there are two peaks at the resistance line. Many traders believe that their stock is going to shoot through this line and the stock will fly all the way to the moon. However, sometimes this resistance line can act as impenetrable force which the stock price can never break through. This line can be so strong that no matter what your other research or emotions may lead you to believe, the stock simply won’t go above this line. When you see a stock making these peaks twice, or especially three times, be prepared for a free fall where you can lose hundreds, possibly thousands of dollars in just a few minutes.

The triple top, is just like the double top, only more compelling of an argument that this stock is more than likely going to free fall in the near future.

Triangles

When performing stock price chart analysis, you will see these triangle candlestick chart patterns all the time. These are mostly common sense on how to read. What you are looking for is whether the triangles are moving up, down, or sideways. You will notice the peaks and valleys of the triangles will go up and down, but they point towards a direction.

To spot these patterns, zoom out and look at a three month or six month span of data and you will notice these become a straight line pointing in a direction, which can be an indicator for what is coming next.

The descending triangle typically shows that prices are going down.

An ascending triangle shows that prices are going up.

The Symmetrical triangle pattern is a stock that is not really moving anywhere which can be a waste of time and energy if it doesn’t bore you to death first.

Flag and Pennant Pattern

Of the patterns we’ve shared today so far, this is one of the easiest to imagine and be completely wrong about. While some traders favor these patterns, it can also be very easy to think you see them when they actually do not exist.

Much like we discussed with the triangles, these work in a similar way.

Wedge Trading Pattern

The Wedge pattern is another one that is similar to the triangle patterns, however it is a longer term pattern and can either be a continuation or a reversal pattern in which the price may rise or fall. You will be more likely to identify this pattern in a 6 month chart. Generally speaking, this is a good one to file under the “Oasis Factor” candidates because it is all too easy to imagine things and hard to predict what direction the stock would move in. The best use for a wedge if anything may be as a signal to wait until that particular stock pattern changes and becomes more stable.

Any thoughts of candlestick chart patterns you’d like to share? Comments are always welcome below!

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